Karen Frawley Appointed New President of the Irish Tax institute
Government must act speedily to sharpen our competitiveness in advance of significant change in international tax which poses a significant risk to our economic model, says Karen Frawley, incoming President of the Irish Tax Institute
9 September: The Irish Tax Institute has said the Government needs to move quickly to sharpen our competitive edge in advance of a period of significant change in international tax rules that is likely to lead to the adoption of a global minimum tax rate.
Speaking at the Institute’s AGM, incoming President, Karen Frawley said although the long running OECD reform process would reach a crunch point at the October meeting of the G20 in Rome, there was no clarity on the detail of the reforms to be approved and no agreed plan for their implementation.
Meanwhile, Congress is due to debate US tax reform proposals which, according to the ITI President, are potentially more damaging to Ireland than the OECD draft agreement. The deliberations in Washington look set to be fractious and could derail the entire reform process.
“Given this lack of clarity, the Minister for Finance was right to reserve our position on changes that could have serious implications for our FDI model.” However, Ms Frawley said the Institute hoped an agreement could be reached before year end because the alternative was unilateral action which would be very damaging to global trade.
“What is clear, amid all the uncertainty, is that significant change is on the way and, as a small trading nation, Ireland will have to come to terms with whatever reforms are agreed. And now is the time for the Government to think about how we can make ourselves more attractive, both within and outside of our tax regime.”
The Institute believes one way to strengthen our position as a business friendly, pro-enterprise economy is to simplify our tax code. Ms Frawley said: “The Government’s current approach to the adoption of new EU anti-avoidance rules is making our regime unnecessarily complex. For example, over layering interest limitation rules on to existing interest deductibility provisions has the potential to create a compliance nightmare.”
She pointed out that the Institute had made recommendations for the reform of our corporation tax regime in successive submissions over recent years. “But there is an added urgency now because the changes the G20 are set to approve next month risk making key parts of our business tax code obsolete.”
For example, the current regime for taxing the foreign earnings of companies based in Ireland would make no sense if, as expected, a global minimum tax rate is introduced. “We urge the Government to proceed with the promised consultation to consider moving to a territorial corporate tax system with a participation exemption for dividends and foreign branches, without further delay. “
Other changes recommended by the Institute include:
- Removing the distinction between trading and non-trading income for tax purposes which, the President said makes no sense in the modern industrial world of intangible assets. “Importantly, it is not a feature of the tax codes of our main competitors,” she added.
- A review of tax measures like the R&D tax credit, to ensure they are competitive. “Other countries have a far more extensive range of incentives. We would need to follow suit if we are to maintain our competitive edge,” added Ms Frawley.
Changes to international tax also have implications for our domestic SME sector and our wider industrial strategy. “While the multinational sector will remain a powerful element of our economy, our obvious overdependence on the sector is unsustainable. There is a crying need to apply to our domestic SMEs, the same rigorous and innovative approach that has served us so well in the FDI sector.”
Ms Frawley said there are excellent examples of world class Irish businesses. “We just need more of them to create a vibrant sector that will provide good jobs and pay taxes to fund high-quality public services.”
In this context, Ms Frawley said the Commission on Taxation and Welfare should examine our capital gains tax regime. “The headline rate is what really matters to investors and at 33%, ours is high by international standards. To attract investment in our SMEs, we need to consider reducing the rate for active business assets. The low level of receipts in recent years certainly suggests the rate is dampening transactions and productivity in the SME sector.”
She said significant change in how we tax multinational companies is fast approaching and in preparation, we must reform our system and sharpen our competitive edge. “Delivering that change will require a mind shift among policy makers that allows them to trust our capacity to build for ourselves the kind of high-performance business sector we have worked so hard to attract from abroad,” concluded Ms Frawley. You can read her full speech at the AGM here.